Book Review : A miserable failure

IT’S ironical that a book that aims to create a myth and living legend of an individual itself has seedlings, even large plants, which ultimately destroy the person. This is the tragedy, and also the crucial insight that a reader can draw from Shantanu Guha Ray’s unbelievably-dramatised book, The Target. It focuses on the “decimation of Jignesh Shah’s global empire, how he broke the market monopoly, and the price he paid”. Read between the lines, and the protagonist comes alive as exactly the opposite of what’s sought to be proved.

There are two key aspects to the book. The first is that Shah, the now maligned, controversial and criticised founder-fraudster of an empire of several exchanges under the umbrella of Financial Technologies (India) Ltd, or FTIL, was a “dreamer, visionary and great mentor”. The second: there was a large, almost all-encompassing conspiracy by governments, politicians, bureaucrats, regulators, competing exchanges, brokers, traders, businesspersons, and activists to ‘kill’ him. Here was an honest, hardworking and innovative person, who build a grand business, and who was deliberately finished off.

Ray fails miserably, and dismally, to prove both. In fact, his so-called evidence, collected through six months of research-more is required for a 2,000-word newspaper or magazine investigation-and interviews with 50 people-more is done for magazine articles-turns out to be the evidence against Shah. As one reads the book, one is left with a bad taste in her mouth-Shah deserved what he got, and he was clearly in the wrong. Let’s look at the various aspects of the book to show how FTIL was a ‘house of cards’ waiting to crash.

Political conspiracy in Shah’s favor In the book, the author claims that the former Finance Minister P Chidambaram, additional secretary in the Finance Ministry KP Krishnan, and Ramesh Abhishek, the head of the Forward Markets Commission (FMC) were the “three musketeers”, or the three architects, who ruined FTIL and Shah. They did so deliberately, and in a measured and step-by-step manner. The trio sought help from other politicians and bureaucrats, as also from the other ministries. A powerful minister, his loyal bureaucrat, and a bending regulator worked in tandem.

Sadly, possibly misleadingly, Ray failed to mention, or even hint, that the rise and rise of Jignesh Shah and FTIL was based on extreme political backing in the initial years. In September 2013, this magazine revealed how powerful ministers, both in NDA-1 and UPA-1 regimes, like Sharad Yadav, the Consumer Affairs Minister during the first dispensation, and Sharad Pawar in the second, supported FTIL’s entry into commodities exchange. In addition, Shah garnered the patronage of a third ‘Sharad’-Sharad Joshi, the farmers’ leader.

There were numerous others, including bureaucrats and regulators, who worked for FTIL’s interests. Many of them even worked for Shah’s Group. The list includes the who’s who: Venkat Chary, former FMC chairman and Additional Chief Secretary of Maharashtra, Ashok Jha, former Finance Secretary, Nitish Sengupta, former Revenue Secretary, SA Dave, former SEBI chairman, Vepa Kamesan, former RBI Deputy Governor, and Atul Rai, former Director in tyhe Finance Ministry. “That is not all, a number of spouses and relatives of FMC, SEBI, RBI and finance ministry employees are working with the MCX (FTIL) Group,” said the article.

This is the reason that FTIL was able to grab a licence for a commodity exchange despite the fact that more experienced and renowned players and partners were in the fray. For example, gfiles revealed in 2013 that KC Mishra, the former FMC chairman, initially gave a licence in 1999 to a consortium of Punjab Warehousing Corporation (PWC), National Stock Exchange (NSE), Mahindra & Mahindra, and ICICI to set up a National Futures Commodity Exchange.

“This consortium had all it took to set up a commodity exchange-NSE’s domain knowledge, PWC’s warehousing, ICICI’s capital, and Mahindra & Mahindra’s marketing infrastructure. Two years later, Dr Kewal Ram, the then FMC chairman, kicked the consortium out of the race. The FMC started looking for fresh applicants,” said the gfiles piece. It was Ram who played a major role in keeping out some of the renowned contenders, and gave the licence to four entities, including MCX, whose promoter-founder, Shah and FTIL, had no prior experience.

Jignesh Shah was backed by Yadav, the then Minister of Consumer Affairs. Shah also met influential bureaucrats like the Economic Affairs Secretary in the Finance Ministry to grab the licence. As the 2013 article questioned: “Obviously, when you are the Minister’s blue-eyed boy, who can stop you?” Shah even managed a World Bank consultant to generate a report, which was used effectively to overrule the criticism against the MCX proposal.

Backed by political masters Once MCX was up-it was set up in a “record nine months”, which itself hints that the policy makers and regulators showed sufficient interest in it-more help was extended to it by the political masters. Large and powerful State-owned entities with interests in commodities trade, like NAFED, Food Corporation of India (FCI), Projects and Equipment Corporation, and MMTC were forced to trade on MCX. NABARD, which has expertise in agriculture marketing, was forced to become an equity partner. Such partnerships reek of political interference to push for the vested interests of Shah and the FTIL Group.

In the book, Ray writes, “Shah had instant help at hand. The State Bank of India took a strategic equity partnership with an 18 per cent equity stake along with seven subsidiary banks, opening the door to other financial institutions like the HDFC Bank and NABARD to move in.” He added how the State-owned entities helped Shah to earn higher revenues and profits. Since 2008, NAFED appointed Shah National Spot Exchange for cotton procurement; it sold 8.73 lakh bales of cotton through it. The exchange sold 1.48 lakh tons of wheat for FCI.

Despite a few official notes and memos, there’s only one definite and authenticated piece of evidence that Ray produces-unfortunately, it is no evidence at all

What was perhaps the biggest, and unprecedented, sop to Shah and his National Spot Exchange was the government’s gazette notification of June 5, 2007. An amendment was made to Section 27 of the Forward Contracts (Regulation) Act, 1952, which exempted all the one-day forward contracts of the exchange from the provisions of the Act. Clause 3 of the Act now read that the National Spot Exchange would be subject only to “regulation by the authorities regulating spot trade in the areas where such trading takes place.”

Ray makes it sound as if Shah, FTIL and his spot exchange deserved the exemption. Since he was such a great visionary, the government had to bend over backwards to accommodate all his demands, and make it easier for his exchange to thrive, and earn huge revenues. The author gloats about the facts that by 2009, “MCX overtook the London Metal Exchange to become the sixth largest most-active commodities bourse in the world, and saw more than $1 trillion in trades”. In a country like India, this wasn’t possible without huge doses of political help.

Evidence of a conspiracy against Shah THROUGHOUT the book, the author sprinkles details of supposed anecdotes and secret discussions, which are obviously completely anonymous. One doesn’t even get to know whether the person, who gave the details to the author, was present in the supposed meeting, nor did he also hear it from a third person. Despite a few official notes and memos, there’s only one definite and authenticated piece of evidence that Ray produces-unfortunately, it is no evidence at all.

On Page 41 and 42, there is a mention of a note (December 19, 2007), which Krishnan, Additional Secretary, prepared for Chidambaram, Finance Minister. The note said that NCDEX was “sponsored by four initial institutional promoters”, which included NSE, ICICI, Life Insurance Corporation (LIC) and NABARD. Subsequently, other government agencies were roped in, which included Punjab National Bank, Canara Bank and Indian Farmers Fertilizers Cooperative. “NCDEX started with contracts in both agro commodities and metals, but gained a commanding lead in agro commodities over other exchanges,” wrote Krishnan.

However, NCDEX performance “suffered significantly” in the past 15 months. Krishnan felt that the “decline has been quite sharp in the last few months and all indications suggest that the situation is set to worsen.” So, the Additional Secretary wanted to do something about it and change the ownership structure and strategy. “The view of many key shareholders and directors is that the only way to revive NCDEX is to ensure that NSE takes an active role in the management…. A key prerequisite for this is for NSE to become the single largest shareholder in NCDEX,” he wrote. So, Krishnan wanted NSE’s stake of 15 per cent to increase by 10-12 per cent through 5-6 per cent sale each by LIC and NABARD.

This was interpreted, grossly wrongly, by Ray to imply two things. One, the Finance Ministry, which had no legal powers over commodities, was batting for NCDEX. Implicit in this was the fact that the ministry wanted to push the case of NSE, “whose top brass, it was rumoured, had the backing of a powerful ministry which had been wary of the growth of MCX, a rival exchange promoted by Shah”, wrote Ray. Krishnan’s note was the key evidence to prove it.

Now this is absurd. The fact is that MCX was the real monopoly, which enjoyed the lion’s share. NCDEX had become the David, whose market share had dwindled down from over 50 per cent (two years ago) to 13 per cent by November 2007. It was the rise of MCX, backed by politicians, which had killed the state-owned NCDEX, not the other way around. As Ray notes, “By 2007, MCX was handling 90 per cent of trades across electronic commodity derivatives exchanges in India.”

In such a position, it is the right of every shareholder-NSE was a shareholder in NCDEX—and it came under the scrutiny of the Finance Ministry, to think of a strategy to revive market share. The real villain in this case is MCX, and not the NSE or NCDEX. The latter did the natural thing.

NSE versus FTIL Group TIME and again, throughout the book, there are references to how the government (read: Finance Ministry) was propping up the interests of the NSE, which was a private entity, in a bid to kill competition (read: Shah and the FTIL empire). He starts his attack on the NSE from its inception, and he writes, “The establishment of NSE through the public sector banks… was in conflict with the very concept of privatisation and free competition.”

In the beginning, according to Ray’s narrative and understanding, “NSE killed all the regional exchanges and even the BSE (Bombay Stock Exchange).” Then it was the turn of the Finance Ministry to “promote NSE”, and a “cold-blooded and systematic destruction of some of the finest Indian institutions” was carried out to achieve this objective. In several instances, according to Ray, it was “difficult to distinguish between SEBI and NSE, the regulator and regulated.”

Obviously, the author has no sense of facts or history, or an understanding of how the exchanges were managed over the past few decades. By the late 1980s, the BSE had become the hub of manipulations, frauds and cheating. Brokers, who ruled the exchange, made a ‘Mickey’ out of the retail investors, and even some of the rich ones. The brokers decided who made money, and when. They upped and lowered stocks’ prices at their own will, and there were powerful cartels that operated in a bid to take away other people’s money. The same was true for the regional stock exchanges, many of which had limited, or zero, operations.

This was the perspective and context in which NSE took birth. And true to its objectives, and despite its shortcomings, it did force the BSE to become better, efficient and transparent. It was the NSE that forced a certain order in the Indian exchanges, and paved the way for the entry of foreign institutional investors in the 1990s. Given the standards at the BSE, no foreigner would have touched an Indian stock on an Indian exchange with a barge pole.

For the author, NSE is the background culprit. As Ray explains, “The NSE margins were over 60 per cent-something that only monopolies enjoyed. Therefore, the NSE, in simple terms, was a monopoly. Oddly enough, while it had been brought in to break the monopoly of the BSE, it ended up becoming an even bigger monopoly. BSE suffered NSE time and again, as did 20 regional stock exchanges, too.” The other facts that he provides prove that it was Shah’s group entities which controlled 80-90 per cent of the trades, which had become the ‘real monopolies. It was now the legitimate right of NSE to fight back.

Hence, there was nothing wrong or illegitimate, contrary to Ray’s reasoning, when the NSE developed its own trading solution to compete against that of the FTIL Group. However, in the words of the author, the “sole objective” of NSE’s decision “was to limit the scope of using ODIN (FTIL’s solution) by broking firms and thereby checkmating Shah. In this case, Shah and FTIL were the bid daddies and in a stronger and powerful position, and not the NSE!

Little idea of the laws IT is bizarre that Ray is a known business journalist, but he seems to have little, sometimes no, idea about corporate concepts and corporate laws. For example, at one point in the book, he states that “MCX and FTIL being two separate legal entities under the Companies Act, it was improper on the part of SEBI to say they were acting in concert.” Well, he should have read the various Acts first, before writing this absolutely wrong statement on “person acting in concert”.

In the context of a takeover, the SEBI Act says that a person acting in concert comprises “persons who, for a common objective or purpose of substantial acquisition… pursuant to an agreement or understanding (formal or informal), directly or indirectly cooperate by acquiring or agreeing to acquire shares or voting rights in the target company….” The Act then details out people and entities, which will be included under this category. Persons acting in concert will include “a company, its holding company, or subsidiary of such company under the same management either individually or together with each other.” By this logic, MCX and FTIL were definitely “acting in concert”.

Similarly, the author tries hard to prove that there was nothing illegal about the operations of the National Spot Exchange. There was no forward trading or rollover of trading at the exchange. It was a spot exchange, and only one-day trading was allowed. He added, as did Shah, that there was no speculation and that no one offered “fixed returns” to the clients. The facts are completely different, and Ray himself includes a few, which demolishes his theory.

As gfiles reported in 2013, “Close to 13,000 investors have lent money through the Exchange platform to less than 25 borrowers, using a two-legged buy/sell contract, that the government and the FMC found illegal. None of these high net-worth individuals would have lent money to a group of little-known borrowers, had it not for the Exchange. The product operated like a vyaj badla scheme, where money was lent in exchange for warehouse receipts and repaid after 25 or 30 days when the receipt was returned to the borrower. However, in most cases, contracts were rolled over beyond 25 days, with the lender collecting just the interest amount.”

A 2012 powerpoint presentation by the National Spot Exchange admitted to the frauds. It said that its contracts “offer unique investment opportunity to investors.” The latter can purchase a T+2 contract and simultaneously sell a T+25 one. “Pay-in obligation is on T+2, while the pay-out of the funds will be on T+25. Entire settlement cycle is of 31-33 days. Price differential between the two settlement dates offers a net annual interest rate of about 14-15 per cent after deducting all expenses, and income arising out of such trades is treated as business income.” What can be more assured and fixed than this?

The author defends Shah time and again, and blames a set of brokers and speculators for the crisis in the National Spot Exchange. He adds that the promoter cannot be blamed for this. “This was rather like accusing the chairman of a bank for loan defaults. Shah, the FMC was repeatedly reminded, was the non-executive vice chairman of the NSEL (National Spot Exchange) board, and not responsible for its day-to-day operations.” Completely absurd!

In a country like India, rarely do promoters and founders keep their hands off the operations. They are involved and nothing gets done without their assent. To say Shah wasn’t involved in the daily affairs is akin to saying that Mukesh Ambani doesn’t know what happens in Reliance Industries and other group companies. In addition, Ray should know, especially as a business journalist, that bank chairmen are indeed blamed for loan defaults. A former chairman is in the docks for the same reason. Generally, a chairman, vice-chairman and CEO-in fact, collectively-are blamed if a company performs badly.

In addition, what is alarming is that the author admits that “the contracts in dispute were a paltry 17 per cent of the total business of NSEL (National Spot Exchange) since its inception.” Paltry! Seventeen per cent of the total since its inception! This is like saying that one-sixth of the turnover of a multi-billion dollar company is fraudulent and illegal.

Curious case of Anjani At two places, the book describes Anjani Sinha, the MD and CEO of the National Spot Exchange, in glorious terms. The first one is indirect; the author gives credit to Shah who, “being a visionary”, selected “appropriate specialists and knowledgeable experts to run his different ventures.” Obviously, Anjani was both. Later, the book is more direct in its praise of Anjani, who is described as a “seasoned tracker of derivatives and financial markets.”

BUT, in several other places, the book attacks Anjani, only because of the evidence given against Shah to the investigating agencies. Since Anjani blamed Shah for the problems and illegalities at the National Spot Exchange, the former becomes someone who had the “art of committing frauds in financial exchanges”. The book then lists out such past frauds in great details. Both descriptions cannot be true. If Anjani had committed wrongs, why did Shah, who chose specialists and experts, hire Anjani in the first place for a top executive post?

To say Jignesh Shah wasn’t involved in the daily affairs (as the author claims) is akin to saying that Mukesh Ambani doesn’t know what happens in Reliance Industries and other group companies

Getting his literature wrong In a bid to idolise Shah, Ray uses literary and mythological characters as comparisons. At one place, the latter contends that Shah had “Gatsby-esque aspirations”. Jay Gatsby, the character in F Scott Fitzgerald’s classic, The Great Gatsby, is described by critics as a “deeply flawed man, dishonest and vulgar, whose extraordinary optimism and power to transform his dreams into reality make him ‘great’ nonetheless.” The literary, and awfully rich, Gatsby worked for a millionaire and dedicated his life “to the achievement of wealth”. He made his money through “criminal activity” and did everything to gain “social position”. If Shah had Gatsby-esque aspirations, he was corrupt to the core.

At several places, the author compares Shah to Mahabharata’s Abhimanyu, the son of Arjun. According to the book, “Shah’s story was similar to that of the proverbial Abhimanyu… who entered the Chakravyuha, a deathly arena surrounded by warriors adopting fair means or foul (mostly foul) in the war. Abhimanyu’s death was blamed on the conspirators because the warrior prince could not figure his way out of the hellhole and was up against seasoned warriors flouting all norms of war to ensure his death.” Towards the end, it adds, “The Chakravyuha was complete, Abhimanyu, destined to be a valiant warrior better than both Karna and Arjun, was choked to death.”

Obviously, Ray has no idea about the Hindu epic. Abhimanyu wasn’t killed by foul or unfair means, although there was deceit involved. Any army, including the Kauravas, had the right to make a Chakravyuha, a defensive strategy. Only, they made it when Arjun, who knew how to enter and break it, wasn’t available for the fight. Abhimanyu, who knew how to enter it but not how to get out, willingly offered his services. He was convinced by the Pandavas that as soon as he entered it, their army will follow and help him to get out. This didn’t happen, and Abhimanyu was trapped inside, and killed in the war.

If one has to pick up a character from the Mahabharata, Shah is more like Duryodhana, the leader of the Kauravas.